Many startup sectors came out of 2021’s hype with a massive hangover in the form of valuations that they simply couldn’t justify as the market dipped and dived. Insurtech startups had it the worst, though, as investors started questioning the viability of the entire category.
A recent report on the sector by Dealroom, Mundi Ventures, MAPFRE, NN Group and Generali refers to this disillusionment as “the death of Insurtech 1.0.”
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That demise started in 2022, when “a broad market downturn, coupled with clear specific challenges of notable insurtech[s] to reach profitability,” contributed to creating a newly challenging environment for insurtech funding, the report said.
This challenging environment is being reflected in the data this year, too: Public insurtechs are struggling, and there’s been a sharp decline in venture capital flowing into the sector.
But money is like water where venture capital is concerned. Despite all the bad news, capital is still trickling into some pockets of insurtechs that are considered different enough from the first wave of companies.
This morning, let’s dig into what’s happening with global insurtech startups and see if we can spot a little light in this murky bog that many insurtech companies are lost in.
A change of profile
The history of the venture market for insurtech startups reflects the global boom and bust in VC investment. As venture saw an explosion in fund formation and capital disbursement through 2021, so did insurtech. And then both slowed down rapidly.
Global insurtech funding declined more than 50% to $2.4 billion in the first six months of 2023, compared to the same period a year earlier, per the report. Comparisons to 2021 times are even more dispiriting.
Insurtech stocks, indexed to the start of 2021, are down 59%, per Dealroom. That is far worse than major indices (S&P 500, NYSE and Nasdaq), and let’s not even bother comparing that to the 38% gain that a more general basket of insurance stocks managed in the same time.
Insurtech stocks peaked in Q1 2021 at a roughly 20x forward revenue multiple, according to the report. Contrast that with those companies’ multiples in Q2 2023: 2x. Indeed, the report shows that insurtech was once the second most highly valued tech sector on the public markets; today, it is the lowest valued of the group.
It’s not hard to understand why investors lost their taste for insurtech. A number of well-funded and popular insurtech startups went public via SPAC-led transactions or IPOs, and then rapidly lost value when the market dipped. Seeing those companies crumble like poorly baked cookies would be enough to give anyone pause.
Unsurprisingly, global venture investment in insurtech fell to $1 billion in Q2 2023, down from $1.4 billion in Q1 2023, according to the report.
That’s the bad news. The good news is that while insurtech startups aren’t seeing much late-stage action, their younger counterparts are faring comparatively well.
The earlier the better
Tracking venture investment into insurtech startups by deal volume allows us to get a good idea of how far dealmaking has slowed for various stages of insurtech companies.
Dealroom notes that while early-stage insurtech deals were down 29% in Q2 2023 compared to Q1 2021, Series B rounds were off a sharper 43%, and late-stage insurtech investments fell 62%.
Such filters are not uncommon in venture. We’ve seen various Series A and B crunches in different parts of the world at different times. And it’s not that shocking to see late-stage deals suffer the most, as they are the easiest to compare to their public counterparts.
But this is not the only bit of good news to be found. Asia appears to be a great destination for insurtech investment, with Southeast Asia seeing insurtech investment soar 58% this year and the rest of Asia posting a small 5% decline. Every other region is down in the double digits.
What’s next?
There isn’t good news for everyone, though. “The need [for] cash, inflated valuation in previous rounds and tough financial market will mean several [insurtechs] might not be able to raise again and end up declaring bankruptcy or going through a fire sale,” the report predicts.
Not all consolidation is bad news, of course. M&A is on the rise in embedded insurance, one of the hottest opportunities in insurtech, with fellow insurtech companies or insurers picking up attractive companies.
More broadly, insurance companies aren’t expected to be the most active buyers of insurtech startups, according to the report. It appears to be a case of “once bitten, twice shy”: “Some insurers will not acquire anymore, after having seen the failure to deliver on promises of some insurtech 1.0 players,” warned the head of NN Ventures, Jeroen Meijers.
Most of the M&A activity, then, might come from other insurtechs or private equity. “With technology-focused private equity funds holding over $300 billion in dry powder, we anticipate a resurgence of ultra-liquidity,” Mundi Ventures’ CEO and general partner Javier Santiso said. “This influx of capital,” he added, “will not only enhance market dynamics but also unlock a multitude of additional investment opportunities.”
We’ll be keeping a close eye on two key trends: the rise of insurtech startups addressing the climate crisis, and the disruptive impact of generative AI on the insurance sector as a whole.